Experiments show that for many two-state folders the free energy of the native state, DeltaG(ND)([C]), changes linearly as the denaturant concentration, [C], is varied. The slope {m = [dDeltaG(ND)([C])]/(d[C])}, is nearly constant. According to the transfer model, the m-value is associated with the difference in the surface area between the native (N) and denatured (D) state, which should be a function of DeltaR(g)(2), the difference in the square of the radius of gyration between the D and N states. Single-molecule experiments show that the R(g) of the structurally heterogeneous denatured state undergoes an equilibrium collapse transition as [C] decreases, which implies m also should be [C]-dependent. We resolve the conundrum between constant m-values and [C]-dependent changes in R(g) using molecular simulations of a coarse-grained representation of protein L, and the molecular transfer model, for which the equilibrium folding can be accurately calculated as a function of denaturant (urea) concentration. In agreement with experiment, we find that over a large range of denaturant concentration (>3 M) the m-value is a constant, whereas under strongly renaturing conditions (<3 M), it depends on [C]. The m-value is a constant above [C] > 3 M because the [C]-dependent changes in the surface area of the backbone groups, which make the largest contribution to m, are relatively narrow in the denatured state. The burial of the backbone and hydrophobic side chains gives rise to substantial surface area changes below [C] < 3 M, leading to collapse in the denatured state of protein L. Dissection of the contribution of various amino acids to the total surface area change with [C] shows that both the sequence context and residual structure are important. There are [C]-dependent variations in the surface area for chemically identical groups such as the backbone or Ala. Consequently, the midpoints of transition of individual residues vary significantly (which we call the Holtzer effect) even though global folding can be described as an all-or-none transition. The collapse is specific in nature, resulting in the formation of compact structures with appreciable populations of nativelike secondary structural elements. The collapse transition is driven by the loss of favorable residue-solvent interactions and a concomitant increase in the strength of intrapeptide interactions with a decreasing [C]. The strength of these interactions is nonuniformly distributed throughout the structure of protein L. Certain secondary structure elements have stronger [C]-dependent interactions than others in the denatured state.