The '86 SR5 Runner I reconditioned this past spring had the center console with rear heater in it. The cloth covering was well worn and the foam padding had also deteriated. The foam was attached to a metal plate and then covered in cloth, then there was a metal trim plate that covered the bottom of the armrest(hid and helped hold down the edges of the cloth on the armrest), there was an inset in the metal plate for where the hinge went. This metal plate is why the hinge sits taller then the top of the storage bin.

Since you want to use the stock hinge, I would use a 1/2" thick piece of wood for the bottom of the new armrest and notch out a spot for the stock hinge.