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Report says Leopalace21's distorted corporate culture to blame for faulty construction

TOKYO -- An interim report published by a third-party panel on faulty construction work at apartment complexes run by Leopalace21 Corp. highlights its distorted corporate culture of prioritizing the efficiency of construction work over residents' safety.

The report points to the possibility that company founder and former President Yusuke Miyama was involved in the changing of materials for walls for its apartment buildings, heightening suspicions that the company was involved in the scandal as an entity.

Miyama, who the panel points out directed the changing of materials, led the company for over 30 years from August 1973 to May 2006, wielding absolute authority over the company's management.

However, it surfaced in May 2006 that he misappropriated over 4.86 billion yen that the company had collected from residents in the name of premiums for its mutual assistance fund, forcing him to step down as president. The following month, he also resigned from the company's board.

The third-party panel points out that urethane foam was used in walls in many Leopalace21 apartment buildings instead of glass wool initially planned to be used without sufficiently examining the substitute material's quality because the change was ordered by Miyama.

The report also underscores the need to investigate whether those involved were fully aware of the need for compliance with relevant legislation.

A final report that the panel will work out by late May will likely clarify specifically how the former president was involved in the wrongdoing, whether the company covered up the problems as an entity, the company's compliance with laws and its corporate governance.

At a news conference in Tokyo on March 18, executive officer Shigeru Ashida declined to answer questions about the details of the interim report.

"We're in a position to cooperate with the third party panel in compiling a final report, so we'd like to refrain from commenting on the matter," Ashida said.

As to the reason why urethane foam was used instead of glass wool initially planned to be used under the design, Ashida explained that urethane foam can be produced more efficiently. Yet, he denied that the company was aware that the practice was illegal.

However, noting that multiple internal documents regarding repair work on deformed or cracked walls made of urethane foam remained at the company, the report points to the possibility that the company was aware of problems involving the quality of outer walls even before the company launched quality checks on all apartments it manages.

Leopalace21 executives' reluctance to get to the bottom of the incident and disclose relevant information will likely deepen apartment owners and residents' distrust in the company.

Leopalace21 is commissioned by apartment owners to build apartment complexes and rents the structures from their owners while paying rent to the owners after deducting management and other costs. The company grew rapidly using this business model.

However, the occupancy rate of its apartments, which had previously been over 90 percent, declined to around 85 percent in February after the faulty construction work was revealed.

It is certain that the occupancy rate will further decline because residents of defective apartment complexes have been asked to move out for repair work.

Those within the real estate industry point out that the company will face financial trouble if the occupancy rate declines below the 80 percent level.

Leopalace21 posted an extraordinary loss of 43.4 billion yen in the April-December period of 2018 deriving from rent guarantees for owners of apartment blocks that remained unoccupied and the costs of repairing defective buildings.

"We think our response is sufficient," an executive told the news conference.

However, if residents continue to leave Leopalace21 apartments, the company will face further financial difficulties.

(Japanese original by Masahiro Kawaguchi, Business News Department; and Norihito Hanamure and Atsushi Matsumoto, City News Department)

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