An arts trust set up with almost £6 million of public money and private donations has debts of £1.2 million a year after opening.

The Old Market, in Upper Market Street, Hove, was feted as "an impetus to the economic regeneration of the Brunswick area" when it was officially opened by its patron, the Duke of Kent, in May last year.

The run-down building was renovated, turned into an arts centre, recording studio and official home of the Hanover Band by The Old Market Trust.

It was awarded £4.3 million in National Lottery funding through the Arts Council to pay for the work on the Grade II listed building. Cash also came from the old Hove Council, English Heritage, Seeboard, the Government's Single Regeneration Budget and private donations.

But the project ran into financial trouble almost straight away and had to be bailed out by Brighton and Hove Council in July last year after a secret report suggested it was in financial difficulties and its main creditor, builders Bovis, would seek a winding up order if not paid.

The council loaned the organisation £275,000 on the condition someone with financial expertise was put on the board of trustees.

Lib Dem councillor for Brunswick, Paul Elgood, said he was surprised to learn the debt was so large.

He said: "I will now be asking questions about how the council officers are monitoring the situation and will be asking the Old Market's chief executive Stephen Neiman to bring councillors up to date on the project."

Mr Elgood said the organisation had his full support but added: "Questions need to be asked because it used public money."

Mr Neiman said he was confident the debt could be paid off. He added it was the result of a shortfall in the contingency funds granted to the project by the Arts Council.

He said: "The cost of conservation work, and work on the acoustics needed to turn the building into a recording studio, was not something we could prepare for because until we started taking the fabric of the building apart we could not know how expensive it would be.

"We asked for a 15 per cent contingency budget in our grant but this was reduced to just £250,000. The budget has never changed.

"If we had got the 15 per cent we would never have been in this situation."

Mr Neiman added other grants awarded to the scheme were also smaller than originally promised.

He said the trust was closely monitored by the Arts Council at every stage of the development and had begun moves to co-opt accountant Andrew Russell to the board before Brighton and Hove Council requested it.

Despite the growing success of the venue, the Old Market Trust was expecting to make a £15,000 loss in the first year but, even after paying the interest on the debt, this was only £3,000.

Mr Neiman said: "This is a manageable debt and there are several positive things in the pipeline which will help us reduce it."