A Mainland real-estate investment firm has acquired Dillingham Ranch on O'ahu's North Shore and is trying to resolve an old issue over supplying nearby residents with water.

An affiliate of Kennedy Wilson Inc. of Beverly Hills, Calif., bought the 2,700-acre property in May for $26 million from an insurance company seized by Washington state regulators.

The sale included the former home of local business tycoon Walter F. Dillingham, an equestrian center, horse boarding facility, 400-head cattle operation and a coconut grove.

But the sale didn't include the ranch's water system, which supplies about 120 Mokule'ia residents and has been a source of contention for parts of the community that rely on a 95-year-old well on ranch property.

Kennedy Wilson is seeking to acquire the ranch's water system and transfer its customers to a proposed municipal water line extension.

The potential transfer involves undetermined costs for residents, some of whom are willing to pay more for a better water system while others are content with their rural system unless it could be improved at little expense.

"Right now we're still getting good water and good service," said Lloyd O'Sullivan, a 40-year area resident. "We're waiting to see what transpires. Nobody has come up with a figure on paper yet."

The water system, which was largely developed under Dillingham to serve ranch neighbors, has become a bigger source of contention in decades following the Dillingham family's sale of the property in 1979.

Many of the problems arose after Japan-based Sankyo Tsusho Co. bought the ranch in 1987 and pursued resort and golf-course development plans to the staunch opposition of the community.

Under Sankyo's ownership, the water system deteriorated and needed substantial upgrading, according to Owen Matsunaga, an attorney who represented a community group that briefly took over the system after Sankyo sold most of the ranch to Metropolitan Mortgage & Securities Co. in 2002.

Metropolitan Mortgage declared bankruptcy in 2004 following disclosure of alleged accounting misstatements, and last year sold part of its Mokule'ia property — nine oceanfront lots covering roughly 100 acres makai of the uplands ranch — to several buyers.

The ranch previously had been transferred to Metropolitan Mortgage affiliate Western United Life Assurance Co., and last year was put up for sale at the direction of Washington insurance regulators that seized Western United.

Kennedy Wilson bought the ranch on May 19, but needs approval of the state Public Utilities Commission to acquire the water system.

The company, in a filing with the PUC, said the system requires an expensive investment that would be better spent on helping system users connect to the municipal water supply.

In a letter to Mokule'ia water customers, Kennedy Wilson said it can offer an "equitable" contribution of financial resources and effort to extend a nearby Board of Water Supply line.

How much of the cost the company is willing to cover was not specified.

A Kennedy Wilson representative did not return calls seeking comment.

In its PUC filing, Kennedy Wilson cited a $1.56 million cost estimate from engineering firm R.M. Towill to extend a 10-inch main 2,800 feet, though the extension would only need to run about 2,000 feet to a bulk water meter serving ranch system users.

Kennedy Wilson said the work would take about 24 months, and also involve a negotiable $3,000 hook-up charge for each customer and other customary charges.

The PUC, which last year determined that the ranch water system should be regulated as a public utility, has yet to render a decision on the request to approve a sale, which needs community support.

Kennedy Wilson in its filing said it hopes to complete a sale by Sept. 1.

The company has not said if it plans to develop the ranch property, parts of which have agriculture zoning that would allow subdivision into two-acre ranch lots with a dwelling. Other parts allow minimum five-acre lots with a dwelling.

Reach Andrew Gomes at agomes@honoluluadvertiser.com.