Neighbors of the nondescript, neatly painted, corrugated-steel warehouse probably have no idea what’s going on inside the South of Market building. And that’s exactly how the building’s operators want to keep it.

Nothing from the outside hints that the structure houses hundreds of herbaceous cannabis plants, kept at a balmy 80 degrees with lighting manipulated to fool the plants into flowering and to control their size. On the prairies, good fences make good neighbors. In the city, carbon-filter ventilation systems do the same for grow houses.

“There hasn’t been a single complaint against any location, and that’s a testament to the good neighbors, the responsible tenants we are able to be,” said Aaron Flynn, head of the San Francisco chapter of the California Growers Association, which represents cannabis growers, and owner of this particular grow house.

When people think of cannabis cultivation, they generally think of rural, outdoor operations in Northern California counties like Humboldt, Mendocino and Trinity. Those counties, collectively known as the Emerald Triangle, boast the largest cannabis production in the country.

But a sizable yet unknown amount of cultivation happens in San Francisco, as well as other urban and suburban cores throughout the state, tucked away in houses, light-industrial buildings or even backyards. The bulk of the city’s operations are concentrated in the southeast quadrant, with a green-tinged triangle emerging in the more industrialized South of Market, Dogpatch and Bayview neighborhoods.

While San Francisco has taken a relatively tolerant approach to urban grow houses, other jurisdictions have organized police raids and are openly hostile to them. The confusion over how to handle them is underscored by the U.S. Drug Enforcement Administration decision on Thursday to keep marijuana classified as a dangerous drug with “no currently accepted medical use.”

Still, more than half the states have legalized its use in some form, and California is easing an industry that has long tried to hide in the shadows into the light of regulation.

Last fall, Gov. Jerry Brown signed a package of bills, known as the Medical Marijuana or Medical Cannabis Regulation and Safety Act, into law. The act creates a framework to regulate virtually every aspect of the medical marijuana industry, which has been operating in a gray area of the law for almost 20 years since California voters passed a ballot measure allowing doctors to prescribe weed for their patients.

With Proposition 64, a state measure to legalize adult recreational use of marijuana, on the November ballot, the need to regulate these businesses has become more urgent.

The industry represents a potential windfall in local tax revenue, as well as a source of jobs. The legal U.S. cannabis industry, estimated at $5.4 billion last year, is expected to grow 25 percent to reach $6.7 billion, according to a report by ArcView Market Research. The firm estimates California’s $2.7 billion medicinal marijuana market will remain the largest in the country through 2020, though it may dip slightly if recreational use is legalized.

Under the new state law, the jurisdiction where the operation resides needs to figure out before 2018 how to give its stamp of approval to these businesses before the owners can go to the state to be licensed. Failing that, the state will set local regulations by default.

“We want to make sure our local small businesses are protected and are able to succeed,” said San Francisco Supervisor Scott Wiener, who called for San Francisco’s first hearing to revamp its regulations, held last month before the board’s land use and transportation committee.

Local regulations could help thwart Big Tobacco, he said. “We want to make sure the industry doesn’t get taken over by the Philip Morrises of this world,” Wiener said.

San Francisco isn’t the first city or county to go through the process. In January, Humboldt County became the first in the state to create a local permitting process. Since then, more than 20 counties and cities have followed, including Oakland, Yolo County, Santa Rosa and Richmond.

San Francisco’s permitting process, which is expected to take more than six months to create, will replace a murky, informal process cobbled together to oversee the city’s cannabis industry over the past five years.

While city officials won’t even hazard a guess at how many cultivators exist within city limits, they do know that 18 growers are registered with the San Francisco Department of Public Health, the de facto regulatory agency for the city’s medical cannabis industry, which also includes 28 licensed retail dispensaries.

Public health officials know who’s on the list and where they are located, but the growers are kept anonymous. This informal approval process is yet another sign that the industry still resides in a legal gray area.

“There’s no rule right now that says you have to let us know about all your grows. But it pushes it more into the legal spotlight,” said Douglas Obana, the city’s inspector for the Medical Cannabis Dispensary Program.

Growers on the city’s list have shown they meet such requirements as zoning and building inspection laws, are located at least 600 feet away from any schools, and sell their product only to licensed medical cannabis dispensaries. If San Francisco police or federal agents were to decide to raid the site, public health officials could intervene on the grower’s behalf.

Cultivators who aren’t on the city’s list will be eligible to apply for a city permit to operate, but Obana says being on the city’s list of known growers offers an advantage. “The ones that will be first in line are the ones already associated with us,” he said.

The cloak-and-dagger atmosphere surrounding the industry appears to have as much to do with security — these operations can produce millions of dollars of product per year — as it does with the desire to fly under the radar and avoid the kind of scrutiny that could disrupt operations.

“If I were a grower who had not gone through the (city’s) approval process, I would be a little nervous,” said Terrance Alan, who is chairman of the San Francisco Cannabis State Legalization Task Force and has helped the local cannabis industry work with the city to develop the new guidelines.

But Alan said that doesn’t mean unapproved growers won’t get permits. “If people can afford to run a good business and be a good neighbor, they should have the opportunity to operate just like anyone else,” he said.

Alex Zavell, senior regulatory analyst for Oakland cannabis attorney Robert Raich, helped the city of Oakland create its permitting process, which the City Council approved in May. He expressed confidence in San Francisco’s ability to do the same.

“I’m optimistic San Francisco values its position as a leader in medical cannabis policy and sees value in having its present cannabis operations have a pathway to licensure,” Zavell said.

Still, Oakland is grappling with some unresolved issues affecting the ordinance. While the city has not started accepting applications under the ordinance, it plans to start doing so soon.

Flynn, of the California Growers Association, is eager to work with San Francisco officials to go beyond the “don’t ask, don’t tell” approach.

The 35-year-old former Marine sergeant, who served tours in Iraq and Afghanistan from 2000 to 2004, said he wants cannabis growers to fall under the same rules as other light industrial businesses in the city.

“As we work with the city to draft this ordinance that’s going to regulate this type of activity, we want to make sure that these are reasonable regulations that are put in place,” said Flynn, whose operations are in the final stages of being added to the Department of Public Health’s list. “We just want to be treated like any other analogous business in the city.”

One midsize San Francisco cultivator, who spoke to The Chronicle on condition of anonymity, said he is wary about the “unknowns” in the city’s pending process, including the fees and costs associated with upgrading the grow houses to code.

“Rent is not cheap in San Francisco. If I have to shut down for six months to a year, I’m looking at $100,000 in overhead (rent) I could potentially lose if I don’t get permitted,” he said, adding that he also has seven employees to consider.

Although he has been operating in the city for four years, he said he’s not on the city’s informal list. He didn’t know it existed until a few months ago. But the grower, who also works at a medical-device company, said he supports legitimizing the industry he hopes will become his full-time career.

“I’m all for getting us permitted and paying taxes,” he said. “We’re just hoping it’s a smooth transition.”

Victoria Colliver is a San Francisco Chronicle staff writer. Email: vcolliver@sfchronicle.com Twitter: @vcolliver