FRANCHISING AND MARKETING ACTIVITIES

Franchise fee revenue includes domestic initial franchise fees and international area development fees of $6 million, $8 million and $8 million for each of the years ended December 31, 2018, 2017 and 2016, 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. Franchise fee revenue is recorded net of annual volume incentives provided to real estate franchisees of $52 million, $62 million and $56 million for the years ended December 31, 2018, 2017 and 2016, respectively.

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 $295 million, $299 million and $282 million for the years ended December 31, 2018, 2017 and 2016, 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. Brand marketing fund revenue was $86 million, $87 million and $83 million for the years ended December 31, 2018, 2017 and 2016, respectively, which included marketing fees paid to the Real Estate Franchise Services segment from NRT of $11 million, $12 million and $11 million for the years ended December 31, 2018, 2017 and 2016, 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,
	2018	2017	2016
Franchised:
Century 21^®	9,637	7,973	7,330
ERA^®	2,331	2,298	2,347
Coldwell Banker^®	2,380	2,330	2,289
Coldwell Banker Commercial^®	171	180	180
Sotheby’s International Realty^®	949	905	836
Better Homes and Gardens^® Real Estate	362	353	332
Total Franchised	15,830	14,039	13,314
Company Owned:
Coldwell Banker^®	672	707	708
Sotheby’s International Realty^®	41	41	41
Corcoran^®/Other	42	41	40
Total Company Owned	755	789	789

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



	(Unaudited) For the Year Ended December 31,
	2018		2017		2016
Franchised:
Beginning balance	14,039		13,314		12,771
Additions	2,149		1,137		847
Terminations	(358	)	(412	)	(304	)
Ending balance	15,830		14,039		13,314
Company Owned:
Beginning balance	789		789		787
Additions	8		20		38
Closures	(42	)	(20	)	(36	)
Ending balance	755		789		789

As of December 31, 2018, there were an insignificant number of franchise agreements that were executed for which offices are not yet operating. Additionally, as of December 31, 2018, there were an insignificant number of franchise agreements pending termination.

In order to assist franchisees in converting to one of the Company’s brands 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. 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 generally over the life of the franchise agreement. Otherwise, related principal is due and payable to the Company. The amount of such franchisee conversion notes were $131 million and $124 million, at December 31, 2018 and 2017, respectively. These notes are principally classified within other non-current assets in the Company’s Consolidated Balance Sheets. The Company recorded a contra-revenue in the statement of operations related to the forgiveness and impairment of these notes and other sales incentives of $29 million, $25 million and $24 million for the years ended December 31, 2018, 2017 and 2016, respectively.