The most common type of note payable is a mortgage, which is used to finance the purchase of real property assets such as land and buildings. The property collateralizes the mortgage, which means the property is held as security on the mortgage.
If the company defaults on the mortgage, the lending institution seizes the property and sells it in an attempt to recover as much of the loan balance as possible.
Mortgages require a formal closing procedure that’s typically done at the offices of a title company, an independent middleman that coordinates the rights and obligations during the sale for the buyer, seller, and mortgage company.
As in the purchase of a personal residence, reams of paperwork (such as the mortgage document and the transfer of the property’s title) are passed back and forth among the buyer, seller, and closing agent for approval and signature.
Another type of long-term debt involves capitalized leases. A company doesn’t always buy its fixed assets — sometimes it leases them. In this scenario, the lessee, the person leasing the property, records the capital lease as both a leased asset and a leased liability.