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I'm not sure where you'd go for fancy leather binding. As you've already found, most of the bigger print on demand services are about mass producing (relatively) low-cost books. I use Lightning Source, and they do offer hardcover production (laminate over board, no dust jacket) for reasonable cost. I've been impressed with the quality of the paperback books they produce, but haven't used their hardcover service yet.
You might investigate some of those photo-book services. We've used Snapfish a couple of times. They produced a good quality cloth-hardcover book each time ... the photo quality was good - not great, but good. (I just checked, and they even offer a leather cover, but not that fancy to my eye.) The interface for design isn't really appropriate for books with a high density of text ... but you could consider using photos/scans of the original hand-written text (assuming it was hand-written). And/or intersperse the text with photos of your grandfather and so on. Just a thought - because I don't have a better one to offer right now.
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