I ran across this issue today when working with a WCF service project. We had generated a settings file through the project properties and in turn added entries into the web.config transform files for the different deployment modes. The base config and the transform blocks for the <applicationSettings> element were what you would expect:
Web.config:
<applicationSettings>
<Namespace.Properties.Settings>
<setting name="test" serializeAs="String">
<value>test</value>
</setting>
<Namespace.Properties.Settings>
</applicationSettings>
Web.Release.config:
<applicationSettings>
<Namespace.Properties.Settings xdt:Transform="Replace">
<setting name="test" serializeAs="String">
<value>test transform</value>
</setting>
<Namespace.Properties.Settings>
</applicationSettings>
However, when a deployment package or publish was called and the transforms occured we were experiencing runtime errors when the values were evaluated by the code. After inspecting the transformed Web.config I noticed that the <applicationSettings>block now had additional linebreaks and whitespace added to the <value> element causing the string values to resolve as invalid in the code.
Transformed Web.Config:
<applicationSettings>
<Namespace.Properties.Settings xdt:Transform="Replace">
<setting name="test" serializeAs="String">
<value>
test transform
</value>
</setting>
<Namespace.Properties.Settings>
</applicationSettings>
Did some research and found the a discussion of the issue on Microsoft Connect. Seems as though there is a workaround involving an override addition to the Settings.cs file of the project that can be implemented while waiting for a HotFix. Or you could just call Trim() on every line where you use one of these values.
Good luck!