FRANCHISING AND MARKETING ACTIVITIES

Franchise fee revenue includes domestic initial franchise fees and international area development fees of $8 million, $8 million, and $9 million for the years ended December 31, 2016, 2015 and 2014, respectively. In addition, franchise fee revenue is net of annual volume incentives provided to real estate franchisees of $56 million, $51 million and $50 million for the years ended December 31, 2016, 2015 and 2014, respectively. The Company’s real estate franchisees may receive volume incentives on their royalty payments. Such annual incentives are based upon the amount of the franchisees commission income earned and paid to the Company during the calendar year. Each brand has several different annual incentive schedules currently in effect.

The Company’s wholly owned real estate brokerage services segment, NRT, pays royalties to the Company’s franchise business; however, such amounts are eliminated in consolidation. NRT paid royalties to the Real Estate Franchise Services segment of $282 million, $284 million and $269 million for the years ended December 31, 2016, 2015 and 2014, respectively.

Marketing fees are generally paid by the Company’s real estate franchisees and are generally calculated based on a specified percentage of gross closed commissions earned on real estate transactions, and may be subject to certain minimum and maximum payments. NRT paid marketing fees to the Real Estate Franchise Services segment of $11 million, $11 million and $14 million for the years ended December 31, 2016, 2015 and 2014, respectively. As provided for in the franchise agreements and generally at the Company’s discretion, all of these fees are to be expended for marketing purposes.

The number of franchised and company owned offices in operation are as follows:



	(Unaudited) As of December 31,
	2016	2015	2014
Franchised:
Century 21^®	7,330	6,897	6,902
ERA^®	2,347	2,355	2,304
Coldwell Banker^®	2,289	2,258	2,396
Coldwell Banker Commercial^®	180	163	167
Sotheby’s International Realty^®	836	794	717
Better Homes and Gardens^® Real Estate	332	304	283
Total Franchised	13,314	12,771	12,769
Company Owned:
ERA^®	—	—	—
Coldwell Banker^®	708	708	651
Sotheby’s International Realty^®	41	41	39
Corcoran^®/Other	40	38	37
Total Company Owned	789	787	727

The number of franchised and company owned offices (in the aggregate) changed as follows:



	(Unaudited) For the Year Ended December 31,
	2016		2015		2014
Franchised:
Beginning balance	12,771		12,769		13,032
Additions	847		445		311
Terminations	(304	)	(443	)	(574	)
Ending balance	13,314		12,771		12,769
Company Owned:
Beginning balance	787		727		706
Additions	38		74		38
Closures	(36	)	(14	)	(17	)
Ending balance	789		787		727

As of December 31, 2016, there were an insignificant number of franchise agreements that were executed for which offices are not yet operating. Additionally, as of December 31, 2016, there were an insignificant number of franchise agreements pending termination.

In order to assist franchisees in converting to one of the Company’s brands, expand their operations or as an incentive to renew their franchise agreement, the Company may at its discretion, provide non-standard incentives, primarily in the form of conversion notes (prior to 2009, the Company issued development advance notes). Provided the franchisee meets certain minimum annual revenue thresholds during the term of the notes and is in compliance with the terms of the franchise agreement, the amount of the note is forgiven annually in equal ratable amounts over the life of the franchise agreement. Otherwise, related principal is due and payable to the Company. The amount of such franchisee conversion notes and development advance notes were $123 million, net of less than $1 million of reserves, and $115 million, net of $1 million of reserves, at December 31, 2016 and 2015, respectively. These notes are principally classified within other non-current assets in the Company’s Consolidated Balance Sheets. The Company recorded a charge in the statement of operations related to the forgiveness and impairment of these notes of $19 million, $17 million and $15 million for the years ended December 31, 2016, 2015 and 2014, respectively.