<PAGE>

                                                                    EXHIBIT 10.7

                           EDA SUBORDINATION AGREEMENT

         THIS EDA SUBORDINATION AGREEMENT ("Agreement") made and entered into
this ______ day of ________________________, 2003, by and between the New Hope
Economic Development Authority, New Hope, Minnesota, a public body corporate and
politic of the State of Minnesota (the "Agency"), and The Business Bank, a
Minnesota corporation ("Mortgagee").

                                    RECITALS

         A.       The Agency and New Hope, LLC, a Minnesota limited liability
company, have heretofore entered into a certain Contract for Private
Redevelopment dated November 12, 2002, (the "Contract") the interest of New
Hope, LLC thereunder having been assigned to and assumed by Navarre Corporation,
a Minnesota corporation ("Company") pursuant to an Assignment and Assumption of
Contract for Private Redevelopment dated September 15, 2003, relating to the
development of certain real property situated in the County of Hennepin, State
of Minnesota, pursuant to which the Agency has agreed to provide assistance in
the redevelopment of the Redevelopment Property (as defined below) the financing
of certain costs of the redevelopment project with tax increment revenues
derived from a tax increment financing district established with the
redevelopment project.

         B.       As defined in the Contract, the "Redevelopment Property" is
legally described in Exhibit A attached hereto, (said property is also referred
to as the "Premises").

         C.       In order to provide funds for the construction and
installation of certain improvements thereon (collectively the "Project"), the
Mortgagee has agreed to make a loan to the Company pursuant to that certain
Promissory Note dated October ____, 2003 in the amount of Four Million Five
Hundred Fifty Thousand and 00/100 Dollars ($4,550,000.00) and payable to the
order of the Mortgagee ("Note") and will loan the proceeds of said Note pursuant
to a Construction Loan Agreement dated October ____, 2003 (the "Loan
Agreement").

         D.       To secure its obligations under the Note, the Company is
executing and delivering to the Mortgagee a Mortgage and Security Agreement and
Fixture Financing Statement ("Mortgage"); with an Assignment of Rents and Leases
each dated October ____, 2003.

         E.       The Note, the Mortgage, the Loan Agreement and the Assignment
of Rents and Leases are hereinafter collectively referred to as the "Loan
Documents".

<PAGE>

         F.       The Company's development of the Premises is subject to the
covenants, conditions, restrictions, and provisions of the Contract, certain
provisions of which are or may be in conflict with the provisions of the Loan
Documents and this Agreement is being entered into for the purpose of resolving
such conflicts.

         NOW, THEREFORE, in consideration of the promises contained herein, the
parties agree as follows:

1.       The Agency certifies that as of the date of this Agreement no default
         exists under the terms of the Contract.

2.       Subject to the provisions of Paragraphs 7 and 8 herein, the Agency
         hereby subordinates in all respects to the Loan Documents, and the
         interest of the Mortgagee, thereunder, and to the liens thereof, any
         and all right, title or interest the Agency has, may have or may
         hereafter acquire in the Premises, the Project or any insurance
         proceeds or condemnation awards with respect thereto, and including
         without limitation any rights of reversion, reentry or forfeiture of
         the Premises available to the Agency, which are in all respects
         subordinate to the Loan Documents and the liens created thereby
         notwithstanding the order of recording, date of execution and delivery,
         order of performance or any other priority requirements which may
         otherwise exist.

3.       The Agency acknowledges receipt of copies of the Loan Documents and
         further acknowledges that this Subordination Agreement, the Loan
         Documents and the loan evidenced thereby are each hereby authorized and
         approved under the terms of the Contract.

4.       The Agency hereby agrees that all rights of the Agency to approve or
         disapprove changes to the Construction Plans for the Project or any
         amendments thereto are set forth in the Contract.

5.       If a default or Event of Default occurs under the Loan Documents, the
         Mortgagee will give the Agency written notice thereof, and the Agency
         shall have the right but not the obligation to cure said default or
         Event of Default provided said cure is performed or effected by the
         Agency within thirty (30) days following said notice. The Mortgagee
         will accept any such performance or cure by the Agency. Nothing
         contained in this paragraph shall be deemed to prevent the Mortgagee
         from commencing foreclosure proceedings or pursuing any other remedy it
         may have under the Loan Documents, or otherwise, prior to the
         expiration of such period so long as a foreclosure sale is not held
         during such period.

6.       If, following the occurrence of any default or Event of Default under
         the Loan Documents, and upon the failure on the part of the Agency to
         exercise its rights described in Paragraph 5 above to cure said default
         or Event of Default, the Mortgagee forecloses by action or
         advertisement or accepts a Deed in Lieu of Foreclosure to the Premises
         or the Project from the Company, the Agency agrees that upon recording
         of such Sheriff's Certificate or Deed in Lieu of Foreclosure, all
         right, title and interest of the Agency in or to the Premises and the
         Project under the Contract or the Agency Deed, including, but not
         limited to, the Agency's rights to reversion of title and reentry as
         provided therein, shall

                                      -2-

<PAGE>

         automatically terminate and be null and void and of no further force or
         effect, and, at the Mortgagee's request, the Agency will deliver,
         within ten (10) working days, to the Mortgagee a Quit Claim Deed
         covering the Premises and the Project. This Paragraph 6 is subject to
         the provisions of Paragraphs 7 and 8 herein.

7.       In the event that, after receipt of a notice of default by the Company
         under the Contract, the Mortgagee (or any successor in interest to the
         Mortgagee) elects within a reasonable time to exercise any rights under
         the Contract to cure or remedy any breach or default by the Company
         under the Contract, with respect to construction of the Minimum
         Improvements (as defined in the Contract), then such exercise of rights
         or cure or remedy shall be in accordance with the terms of the
         Contract. Nothing herein shall be construed to create any obligation of
         the Mortgagee to perform under the contract or to cure or remedy any
         default of the Company under the Contract.

8.       In the event that the Mortgagee exercises its right under Paragraph 7
         to cure or remedy defaults and is diligently proceeding to do so, the
         Agency will not exercise its right to re-enter and take title to and
         possession of the Premises; provided, however that in the event that
         the Minimum Improvements or other improvements reasonably satisfactory
         to the Agency are not completed within one year from the date the
         Mortgagee acquires title to the Project and Premises, the Agency shall,
         notwithstanding a foreclosure of the Mortgage, have the rights set
         forth in the Contract and the Agency Deed to re-enter and take title to
         and possession of the Premises pursuant to the Contract and the Agency
         Deed, by paying to the Mortgagee the principal amount and accrued
         interest on the Note as if they were outstanding plus costs and
         expenses of the Loan Agreement and amounts due under Mortgage as if
         they were outstanding. The provisions of this Paragraph 8 relating to
         the right to re-enter shall become null and void and of no further
         effect upon delivery by the Agency to the Company or the Mortgagee of
         the Certificate of Completion (as defined in the Contract) or upon
         filing by the Agency of a similar certificate if improvements other
         than the Minimum Improvements are constructed. Nothing contained in
         this Paragraph 8 shall be construed to release the Company from its
         obligation to construct the Minimum Improvements as required by the
         Contract.

9.       The Agency agrees that under any circumstances wherein the Premises may
         revest in the Agency such revesting shall be expressly subject and
         subordinate to the provisions of the Loan Documents and the lien of
         Mortgage.

10.      The Agency represents to the Mortgagee as follows:

         a.       The making, delivery and performance of this Agreement have
                  been duly authorized by all necessary action and this
                  Agreement, when executed, shall be the legal, valid and
                  binding obligations of the Agency, enforceable in accordance
                  with its terms;

         b.       The Project is permitted by, and if completed in accordance
                  with the Construction Plans submitted to and approved by the
                  Agency under the Contract, will be consistent with the
                  Redevelopment Plan (as defined in the Contract) and will, to
                  the knowledge of the Agency, comply with all applicable zoning
                  ordinances;

                                      -3-

<PAGE>

         c.       To the knowledge of the Agency, the Redevelopment Plan (as
                  defined in the Contract) complies with all applicable
                  environmental laws and regulations; and

         d.       The making, delivery and performance of the Contract have been
                  duly authorized by the Agency and is the legal, valid and
                  binding obligation of the Agency.

11.      Notwithstanding anything to the contrary contained herein, the terms
         and provisions of the exceptions to subordination set forth in Section
         10.10(c) of the Contract, and the rights of the Agency thereunder,
         shall be and remain prior and superior to the Loan Documents and shall
         survive a foreclosure of the Mortgage, and the Mortgagee, or any other
         person or entity which acquires title to the Premises as a result of a
         foreclosure sale or Deed in Lieu of Foreclosure shall take title to the
         Premises subject to the terms and provisions thereof.

12.      The Agency and the Mortgagee acknowledge that the Mortgagee is not a
         party to the Contract, and that this Subordination Agreement contains
         the entire agreement between the Agency and the Mortgagee with respect
         to each other under the Contract, and that this Agreement may be
         amended only in writing signed by both parties hereto.

13.      The rights given to the Mortgagee under this Agreement are in addition
         to the rights of the Mortgagee under the Loan Documents and the
         documents related thereto. In the event of any inconsistency between
         the terms of this Agreement and the terms of the Loan Documents or the
         Contract, the terms of this Agreement shall control to the benefit of
         each of the parties thereto and their respective successors and
         assigns.

14.      Any notices, certificates or other communications hereunder shall be
         sufficiently given and shall be deemed given when mailed by certified
         or registered mail, postage prepaid, when the proper addresses
         indicated below. Unless otherwise designated by the respective parties,
         all notices, certificates and communications to each of them shall be
         sent to the addresses designated below:

               Agency:              The New Hope Development Authority
                                    4401 Xylon Avenue North
                                    New Hope, Minnesota 55428

               Mortgagee:           The Business Bank
                                    Attention: Peter Reichardt
                                    11100 Wayzata Boulevard, Suite 150
                                    Minnetonka, Minnesota 55305

15.      This Agreement shall inure to the benefit of and shall be binding upon
         the parties and their respective successors and assigns including any
         subsequent holder of the Mortgage.

         IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered as of the day and year first above written.

                                      -4-

<PAGE>

                   THE NEW HOPE ECONOMIC DEVELOPMENT AUTHORITY

                                                By _____________________________
                                                Its President

                                                By _____________________________
                                                Its Executive Director

                                                THE BUSINESS BANK

                                                By _____________________________
                                                Its Senior Vice President

STATE OF MINNESOTA    )
                      )ss.
COUNTY OF             )

         The foregoing instrument was acknowledged before me this ____ day of
October, 2003, by __________________________ and __________________________, the
President and the Executive Director of the New Hope Economic Development
Authority, a public body corporate and politic of the State of Minnesota, on
behalf of the body corporate and politic.

                                             ___________________________________
                                             Notary Public

STATE OF MINNESOTA    )
                      ) ss.
COUNTY OF ___________ )

         The foregoing instrument was acknowledged before me this ____ day of
October, 2003, by ___________________________, the Senior Vice President of The
Business Bank, a Minnesota corporation, on behalf of the corporation.

                                             ___________________________________
                                             Notary Public

                                      -5-

<PAGE>

THIS DOCUMENT WAS DRAFTED BY:

BEST & FLANAGAN LLP
225 South Sixth Street, Suite 4000
Minneapolis, MN 55402-4331
Phone: (612) 339-7121

                                      -6-

<PAGE>

                                    EXHIBIT A

                                LEGAL DESCRIPTION

                                      -7-